A brief introduction to a very important topic
Derivatives — what are they exactly? Many people are
familiar with the term, even if they don't quite grasp its
meaning.
In recent years, the reputation of some derivative instruments
has been tarnished greatly, with one of the unfortunate knock-on
effects of the financial crisis being a perpetual fear of the term.
This largely results from the emergence of the news that
Collateralized Debt Obligations (CDOs) were one of the central
causes of the 2008 crash.
Warren Buffet famously claimed that CDOs were 'financial
weapons of mass destruction', and when Buffet speaks, many
listen.
In reality, however, derivatives are an essential part of global
finance, making up a massive majority of the international financial
market. They have been in existence as long as humans have bartered
and the derivatives as we know today came into being in the
1930s.
